Nicholson v. United Pacific Insurance

No. 84-247

I N THE SUPREME COURT O THE STATE O MONTANA

F F

1985

A A D.

L N NICHOLSON,

P l a i n t i f f and Respondent,

-vs-

U N I T E D PACIFIC INSURANCE COMPANY,

Defendant and A p p e l l a n t .

APPEAL FROM: D i s t r i c t Court o f t h e F i r s t J u d i c i a l District,

I n a n d f o r t h e County o f Lewis & C l a r k ,

The H o n o r a b l e Henry L o b l e , J u d g e p r e s i d i n g .

COUNSEL O RECORD:

F

For Appellant:

George T . Bennett; John R . Kline argued, Helena,

Monta.na.

For Respondent:

Luxan & M u r f i t t ; Gary D a v i s a r g u e d & T e r r y C o s g r o v e

a r g u e d , H e l e n a , Montana

Submitted: June 1 8 , 1 9 8 5

Decided: December 1 7 , 1985

Filed: DEC 1 1 1985

----& +*--.

<:

Clerk

Mr. Justice L. C. Gulbrandson delivered the Opinion of the

Court.

The defendant, United Pacific Insurance Company (UPI)

appeals from a. judgment entered upon a jury verdict, and the

subsequent denial of its motion for a judgment

notwithstanding the verdict, in the District Court of the

First Judicial District, Lewis and Clark County.

Nicholson, the plaintiff, instituted suit against UP1

following a notice of default. He alleged several causes of

action, including breach of contract, negligent

misrepresentation, and fraud and deceit. He requested

specj-fic performance, compensatory damages and an a.ward of

punitive damages for breach of the implied covenant of good

faith and fair dealing. UP1 answered and counterclaimed

alleging breach of contract, fraud in the inducement and

breach of the implied covenant of good faith and fair

dealing. We affirm the judgment and the denial of UPI's

motion for a judgment notwithstanding the verdict .

UPI, a Washington ba.sed insurance company, has a branch

office in Helena, Montana. Although subsequently renewed,

UPI's lea.se on its space was due to expire September 30,

1982. UP1 desired to locate new and larger office space in.

Helena.

Nicholson owns a building in downtown Helena called the

New York Block. He also owns two construction companies,

Nicholson, Inc. and Alan D. Nicholson, Inc. One of

Nicholson's construction companies did the construction work

in the New York Block.

In late 1980 or early 1981, Nicholson learned of UPI's

desire for new office space. He contacted Jess Starns, the

Helena branch manager, and suggested UP1 consider locating in

the New York Block. James Heath, facilities vice-president

for UPI, came to Helena in July 1981 and toured the space

offered by Nicholson. Thereafter, Nicholson wrote a series of

letters to Starns and Heath encouraging UP1 to rent space in

the New York Block. Along with the letters, Nicholson

forwarded various draft proposals for both the New York Block

and the surrounding downtown mall area. Additionally,

Nicholson represented to UP1 that he would remodel the New

York Block to UPI1s specifications at his own cost.

In January 1982 both parties executed a letter of

intent to enter a lease. Nicholson then proposed and

circulated a draft lease. After negotiations, the parties

both signed the lease by April 14, 1982. Two key conditions

of the lease agreement were the requirement that Nicholson

confer with UP1 about the renovation of the New York Block

space and that the final plans were subject to mutual-

approval.

While work progressed, disputes arose between Nicholson

and UP1 over the renovation project. These disputes revolved

around interpretation of the renovation plans and about

aspects of the project that had not been included within

them. Nicholson and his architect were constantly in contact

with the UP1 planner in Seattle, Washington and the company

architect in New York City.

On July 29, 1982, John Heath visited Helena. At this

time he told Nicholson that UP1 had never approved the

construction plans. After the Heath visit, more problems

arose. In addition to the problems with interpreting the

construction plans, Nicholson and UP1 began noting difficulty

in dealing with each other. Nicholson had increasing trouble

in communicating with the appropriate authorities within the

UP1 corporate structure to gain approval of his proposals.

In August, Nicholson called the UP1 architect directly in New

York City and discovered that he was out of the office until

August 25, three days before the project was to have been

completed. On August 24 Nicholson sent his final revised

plans to UPI. On August 27 Nicholson received a letter from

UP1 rescinding the lease. The letter alleged Nicholson's

latest architectural drawings were incomplete and. lacking in

proper specification and detail, that the circumstances had

changed materially and that the New York Block area was

blighted.

UP1 concluded:

Our investment in time and money

continues to be greater than yours;

therefore, from a business standpoint we

have no choice but to rescind our lease.

We will cease further activity on this

project .

Up to this point Nicholson had expended $91,783 in remodeling

costs. Nicholson then attempted to contact the president of

UPI. Failing that, Nicholson sent UP1 a notice of default on

September 10, 1982 and then filed a complaint.

During discovery it became apparent that, at the time

the events surrounding this action occurred, a "secret" UP1

task force had made several recommendations about

reorganizing the company. Most pertinent to this ca.se was

the recommendation that many of the functions and employees

of the Helena office be transferred to Salt Lake City, Utah.

Thus, UP1 would have no need for the expanded office space in

the New York Block. Nichol-son argued that when UP1 realized

this, it became intransigent and threw obstacles in his path

to cause him to breach the lease agreement. Nicholson also

argued that UPI's concern with alleged "urban blight" in the

downtown area had never been made known to him until he

received word of rescission. In response to UPI's

allegations that he did not meet all of the specifications of

the architectural plans, he contended that he had difficulty

in communicating and gaining approval for any final

decisions; that UP1 was intransigent on several aspects of

the project which were merely being held as "bargaining

chips;" and that, as with any renovation of an old building

such as the New York Block, unforeseen difficulties arose.

Based on all of this, Nicholson alleged UP1 rescinded the

lease without justification and thus, in addition to being

liable for breach of contract, should he held liable for

exemplary damages for a breach of the implied covenant of

good faith and fair dealing.

In its answer and counter-suit UP1 alleged Nicholson

fraudulently misrepresented the conditions existing in both

the New York Block and the downtown area and failed to

fulfill the requirements called for in the architectural

plans incorporated in the lease agreement. UP1 contended

Nicholson did this because he was in financial trouble and

could not perform his contractual duties. Thus, UP1 alleged,

Nicholson began to "cut corners" thereby breaching the

agreement. Further, UP1 alleged Nicholson began to use items

not specifically mentioned in the lease agreement or

architectural plans as a tactic to bargain against the more

costly aspects of the remodeling project. Finally, UP1

attempted to portray Nicholson's work as shoddy.

The case went to trial on February 21, 1984. At the

end of plaintiff's case UP1 moved for a directed verdict and

renewed this motion at the close of the evidence. The court

denied UPI's motions and submitted the case to the jury. The

jury returned a verdict in favor of Nicholson, assessing

compensatory damages of $211,105 and exemplary damages of

$225,000 against UPI. UP1 then filed a motion for judgment

notwithstanding the verdict or, in the alternative, for a new

trial.

Hearings were held on UPI's motion, on Nicholson's

motion for interest to be assessed at 18% and his request for

attorney's fees and costs. On May 4, 1984, the District

Court entered an order denying UPl's motion for a judgment

notwithstanding the verdict and new trial, setting the

judgment interest rate at lo%, a-warding Nicholson attorney's

fees of $75,000 to bear interest at 10% and awarding him

$858.70 of the requested $20,000 for costs. The District

Court entered final judgment on May 23, 1984. On that same

day, UP1 filed notice of appeal and on May 24, 1984,

Nicholson filed a notice of cross-appeal.

Appellant raises the following issues:

(1) Whether UP1 was entitled to a directed verdict.

(2) Whether there was any basis in law for the jury's

award of punitive damages.

(3) Whether the compensatory damages awarded to

Nicholson were excessive as a matter of law.

(4) Whether Nicholson was entitled to an award of

attorney's fees.

Nicholson presents the following issue on cross-appeal:

(1) Whether the District Court erred in setting the

pre- and post-judgment interest rate at 10% and erred in its

award of costs.

UP1 characterizes the lease agreement as an executory,

unilateral contract and argues that since Nicholson failed to

perform, judgment should be granted to UP1 as a matter of

law, citing Rogers v. Relyea (1979), 184 Mont. 1, 601 P.2d

37. Further, it claims Nicholson did not prove that UP1

wrongfully prevented his performance, thus, McFarland v.

Welch (1913), 48 Mont. 196, 136 P. 391, mandates a verdict j n

.

UPI's favor. In response, Nicholson argues the agreement

required concurrent performance by UP1 and he presented

substantial evidence it wrongfully failed to do so.

considering motions for directed verdict its

procedural successor, a judgment notwithstanding the verdict,

the District Court must view the evidence in a light most

favorable to the plaintiff. MacDonald v. Protestant

Episcopal Church (1967), 150 Mont. 332, 435 P.2d 369. If a

prima facie case is made out, the motion should be denied.

Motions made pursuant to Rule 50(b), M.R.Civ.P., cannot he

granted if there is substantial conflict in th.e evidence.

Like any form of directed verdict, it rests on a finding that

the case of the party against whom it is directed is

unsupported in some necessary particular. Jacques v. Montana

Nat. Guard (1982), 199 Mont. 493, 649 P.2d 1319; Yetter v.

Kennedy (1977), 175 Mont. 1, 571 P.2d 1152.

UP1 interprets the contract too narrowly. Rather tha.n

simply calling for Nicholson to provide possession and

adequate plans, the lease set up a bilateral obligation on

UP1 to - with Nicholson in designing and approving the

work -

remodeling plans. Thus, Rogers, 184 Mont. 1, 601 P.2d 37,

which considers unilateral or "dependent" contract

obligations, does not apply.

Section 4.01 of the lease specifies as follows:

Landlord agrees, at its sole cost and

expense, to make the space ready for

occupancy by the Tenant to the Tenant's

normal specifications for leased space as

indicated on the Tenant's final plans

which plans will be mutually approved by

the Tenant and Landlord before work

commences on the space.

The work to be done by the Landlord, at

it [sic] sole cost and expense, to make

the space ready for occupancy will

include the cost of architectural

construction and layout and furniture

arrangement documents mutually acceptable

to Landlord and Tenant . . If Tenant .

requests changes, Landlord's time to

complete the premises will be

appropriately extendbed. (Emphasis

added. )

This language imposed on UP1 an obligation to deal with

Nicholson. In any satisfaction-type contract there is an

obligation to act reasonably if withholding approval. Taking

UPI's argument to its logical conclusion points to its

weakness. Even assuming that Nicholson, in the middle of

July, had forwarded to IJPI remodeling plans that were

adequate, would UP1 still be able to avoid its obligation by

refusing to approve them? No. The lease agreement put the

parties into a situation where both had independent

obligations to perform by dealing reasonably with the other

over the precise details of the remodeling. The obligation

each assumed in this regard was the obligation to

co-operate--that co-operation was a condition to the other's

performance. Therefore, we hold that the District Court

properly denied UPI's motions for a directed verdict.

In the second issue, UP1 argues punitive damages were

not available to Nicholson as a matter of law. It bases this

argument on the absence of any Montana cases imposing an

obligation of good faith and fair dealing independent of a

contract where the parties are in substantially equal

bargaining power. This issue contains two separate parts.

First, whether the implied convenant of good faith and fair

dealing applies to the case at bar. Second, assuming the

implied covenant applies and was breached by UPI, whether

punitive damages are available.

Both Nicholson and UP1 requested instructions on the

implied covenant of good faith and fair dealing. Montana has

long adhered to the rule that an instruction given without

objection becomes the "law of the case." See e.g., Melzner

v. Chicago, Milwaukee & St. P. Ry. Co. (1915), 51 Mont. 487,

153 P. 1019, and Bolstad v. Groskurth (1961), 139 Mont. 64,

360 P.2d 101. UP1 did not object to the instructions on the

implied covenant and, further, the District Court gave one of

the instructions offered by UPI. However, in order to

properly address the question of whether a basis for punitive

damages exists, we must discuss whether the implied covenant

of good faith and fair dealing applies in this case and

whether the covenant was breached.

In First Security Bank of Bozeman v. Goddard (1979),

181 Mont. 407, 593 P.2d 1040, we observed that the "special

considerations" giving rise to the implied covenant in

consumer insurance contra.cts "do not apply to an ord.inary

contract between businessmen." 181 Mont at 419, 593 P.2d at

1047, quoting Battista v. Lebanon Trotting Associati.on (6th

Cir. 1976), 538 F.2d 111, 117-118. ~ u c hhas happened to

Montana case law on this issue since Goddard and Battista.

See, Graham and Luck, The Continuing Development - - -

of the Tort

- - Faith - Montana, 45 Mont.L.Rev. 43 (1984) and Harman,

of Bad in

An

- Insurer's Liability - - -Tort - Bad

for the - of Faith, 42

M0nt.L. Rev. 67 (1981) . Here, the District Court interpreted

our recent cases as implying the covenant of good faith and

fair dealing into the contract between Nicholson and UP1 and

allowed Nicholson to recover for the correlative tort. The

District Court may have been motivated by the fact that both

parties originall-y alleged the other to have acted in breach

of the implied covenant and the case went to the jury on

instructions from both parties.

We recognize the call of commentators and attorneys

alike for this Court to address the uncertainty this new area

of law has engendered. We observe though, that uncertainty

is characteristic of any new area of law in our common law

system. Nonetheless, the time is appropriate to more fully

articulate our conception of what has been termed loosely as

"bad faith," but is termed more accurately as the tort of

breach of the implied covenant of good faith and fair

dealing.

In Montana, we have not expressly extended this tort to

all contract breaches. In Reiter v. Yellowstone Co. (Mont.

1981), 627 P.2d 845, 38 St.F.ep. 686, this Court began the

process of implying the covenant in some contracts. There,

we found "some basis for implying covenants of good faith in

contracts," Reiter, 627 P.2d at 849, citing S 28-1-201, MCA,

but went no further. Thereafter, we began finding the

covenant present in a variety of contractual situations,

characterized by aspects of adhesion or inequity. In Owens

v. Parker Drilling Co. (Mont. 1984), 676 P.2d 162, 41 St.Rep.

66; and Goddard, 181 Mont. 407, 593 P.2d 1040, this Court

found these aspects indicated in the particular contra-ctual

relationship by the fact that the legislature had enacted

laws setting forth a specific duty on the part of one of the

parties to redress the inequities of the situation. In

Owens, 676 P.2d 162, the employer allegedly violated

49-4-101 and -102, MCA, prohibiting an employer from

discharging an employee solely because he was handicapped. In

Goddard, 593 P.2d at 1047, the insurer violated the specific

statutory duty in S 33-21-105, MCA, to settle valid cia-ims

promptly.

The covenant of good faith and fair dealing has been

implied in situations where there is no specific statutory

duty, but where similar indicia of adhesion or inequality is

present. In Weber v. Blue Cross of Montana (1982), 196 Mont.

454, 464, 643 P.2d 198, 203, this Court ruled:

Blue Cross has an obligation to act in

good faith with its members. This is

especj-ally true beca.use Blue Cross is in

a -much better bargaining position than

those applying for membership in its

program. (Emphasis added.)

On this basis, a legal obligation of good faith and fair

dealing also has been extended to employers dealing with

employees in Gates v. Life of Montana (Mont. 19831, 668 P.2d

213, 40 St.Rep. 1287, and Dare v. Montana Petroleum Marketing

Company (Mont. 1984), 687 P.2d 1015, 41 St.Rep. 1735; to fee

arrangements between a lawyer and his client, Morse v.

Espeland (Mont. 1985), 696 P.2d 428, 42 St.Rep. 251; and to

banks dealing with customers, First National Bank of Libby v.

Twombly (Mont. 1984), 689 P.2d 1226, 41 St.R.ep. 1948 and

Tribby v. Northwestern Bank of Great Falls (Mont. 1985) , 704

P.2d 409, 42 St.Rep. 1133.

California law implies a covenant of good faith and

fair dealing into every contract, commercial, insurance,

employment, or otherwise. Cohen v. Ratinoff (1983), 147

Cal.App.3d. 321, 195 Cal.Rptr. 84, citing McWilliams v.

Holton (1976), 248 Cal.App. 447, 451. Recently, in Seaman's

Direct Buying Service, Inc. v. Standard Oil Co. (Cal. 1984),

686 P.2d 1158, the California court reaffirmed this, stating

"the proposition that the law implies a covenant of good

faith and fair dealing in all contracts is well established."

686 P.2d at 1166. In Seaman's, the California Supreme Court

considered whether and under what circumstances the plaintiff

could recover in tort for the breach of an arms-length

contract. Seaman's involved a marine fuel dealer who wished

to lease re-developed wharf space from the city of Eureka,

California. After negotiations with Standard Oil, the

parties ultimately signed a letter agreement in which

Standard promised a ten-year oil supply "subject to our

mutual agreement on the specific wording of contracts to be

drawn ... " 686 P.2d at 1 1 6 1 . On that basis Seaman

obtained a forty-year lease. One year later Standard

notified the dealer that it would not proceed with the

agreement because of market conditions and other factors.

When pressed, Standard took the position that no contract had

ever been si-gned. The California Supreme Court invented a

new tort and held that a defendant would be subject to tort

remedies when, in addition to breaching the contract, it

sought to shield itself from liability by denying in bad

faith and without probable cause, that a contract exists or

ever existed. The Seaman's court carefully limited the scope

of the new tort to egregious situations. The California

Court of Appeals, in Quigley v. Pet, Inc. (1984), 1 6 2

Cal.App.3d 223, 2 0 8 Cal.Rptr. 394, explained this new tort as

"depending upon a special kind of impermissible

activity ... " 2 0 8 Cal.Rptr. at 4 0 2 .

While we decline to extend the breach of implied

covenant to all contract breaches as a matter of law, as

California has done, we agree with the statement in Quigley,

supra, that the tort resulting from its breach depends on

some impermissible activity. The Montana cases discussed

above focus on the action of the breaching party in the

relationship to find a breach of the implied covenant, not

just the existence of a breach of contract.

At this point a helpful distinction should be noted

between an intentional breach or one motivated by

self-interest, giving rise to only contract damages, and the

action which would give rise to a breach of the implied

covenant, resulting in tort damages. Historically, a party

to a contract generally had the right to breach and pay

damages rather than perform. The non-breaching party,

theoretically, is "made v~hole" from the damages paid

following the breach and thus still receives benefits from

the agreement.

Contract law is based in part upon the

assumption that certain intentional

breaches are to be encouraged.

Permitting parties to breach their

contracts promotes an efficient economy,

at least when the gains from the breach

exceed the expected pecuniary injuries of

the promisee.

Diamond, - - - - Bad Faith Breach of Contract: - -

The Tort of When, If

7

- - Should It Be Extended Beyond Insurance Transactions,

At All, 7 -

64 Marquette Law Review 425, 453 (1981). But whether

performing or breaching, each party has a justifiable

expectation that the other will act as a reasonable person.

Neal v. Farmers Ins. Exchange (Cal. 1978), 582 P.2d 980. The

nature and extent of an implied covenant of good faith and

fair dealing is measured in a particular contract by the

justifiable expectations of the parties. Where one party

acts arbitrarily, capriciously or unreasonably, that conduct

exceeds the justifiable expectations of the second party.

The second party then should be compensated for damages

resulting from the other's culpable conduct.

In the case at bar, the jury awarded Nicholson both

compen.satory and punitive damages as a result of UPI's

conduct. Section 27-1-221, MCA (1983), in effect at the time

of trial, provided :

In any action for a breach of an

obligation not arising from contract

where the defendant has been guilty of

oppression, fraud, or malice, actual or

presumed, the jury, in addition to the

actual damages, may give damages for the

sake of example and by way of punishing

the defendant.

As discussed above, the implied covenant of good faith and

fair dealing is not an obligation arising from a contract.

In order for punitive damages to be awarded in a tort action

for a breach of this covenant, the breach must amount to

oppression, fraud or malice, as stated in the statute.

Another concern in this issue is whether substantial

evidence supported the jury's verdict on punitive damages.

Substantial evidence is relevant evidence which a reasonable

person could accept as adequate to support a conclusion.

See, e.g., Harmon v. Deaconess Hospital (Mont. 1981), 623

P.2d 1372, 38 St.Rep. 65. The District Court, in reviewing

UPI's motion for judgment notwithstanding the verdict and new

trial, noted that the parties produced contradictory evidence

on every substantive fact issue. It also noted:

At the time the plaintiff (a very

credible witness) was testifying, at the

end of his direct, there might have been

some doubt as to whether he had presented.

enough facts to justify the awarding of

exemplary damages. However, after

intensive and searching cross examination

of plaintiff, he amplified and enhanced

his testimony on punitive damages to such

a degree that there was no doubt that an

award of such was justified if the jury

chose so to do.

We hold the jury had adequate evidence on which to find the

culpable conduct necessary for an award of punitive damages.

The jury received instructions discussing malice and

fraud, several of which were submitted by UPI. UP1 objected

to an instruction offered by Nicholson which stated. in part:

Punitive damages may be awarded for

recklessness, for reckless conduct, for

willful or wanton misconduct, willful

disregard of duty, or willful or wanton

disregard of the rights of others. In

Montana, the above and foregoing conduct

may amount to presumed malice which has

been defined as follows:

"When a person knows or has reason to

know of facts which create a high degree

of risk of harm to the substantial

interests of another, and either

deliberately proceeds to act in conscious

disregard of or indifference to that

risk, or recklessly proceeds in

unreasonable disregard of or indifference

to that risk, his conduct meets the

standard of willful, wanton, and/or

reckless to which the law of this State

will allow imposition of punitive damages

on the basis of presumed malice."

This instruction apparently was drawn from Owens v. Parker

Drilling Co. (Mont. 1984), 676 P.2d 162, 41 St.Rep. 66, where

this Court adopted a standard for presumed malice expressing

a "level of conduct . . . so culpable as to warrant an award

of punitive damages." Owens, 676 P.2d at 164, 41 St.Rep. at

69. The instructions as a whole given by the court required

the jury to find egregious conduct before awarding punitive

damages. We find no error in the giving of this instruction

under these circumstances.

The third issue asks whether Nicholson received

excessive compensatory damages. The jury returned a verdict

on Nicholson's claim for breach of the lease agreement for

$211,105. The instruct?ons included requests for $115,572

for the value of the lease and for $95,533 for remodeling

expenses and finance charges on those expenses. UP1 argues

that Nicholson received a double recovery because the verdict

awarded him both the full lease value, and the remodeling

expenses he had incurred prior to the breach. This, UP1

contends, is in violation of 5 27-1-303, MCA, which requires

that :

No person can recover a greater amount in

damages for the breach of an obligation

than he could have gained by the full

performance thereof on both sides unless

a greater recovery is specified by

statute.

They also argue that renovation costs are not recoverable as

special damages for breach of an agreement to enter a lease.

H.S. & D. Investment Co. v. McCool (Or. 1932), 9 P.2d 809 and

Brodsky v. Allen Hayosh Industries (Mich. 1965), 137 N.W.2d

771. Nicholson responds that the jury received proper

instructions, that the evidence produced at trial supports

the verdict and that UP1 waived any objection.

The jury was properly instructed on the amount and type

of damages it could award. The court gave a general contract

damages instruction pursuant to § 27-1-311, MCA, followed by

instructions relating to Nicholson's duty to mitigate the

damages by attempting to re-lease the premises. Finally, the

jury was instructed that:

If you find that Plaintiff made

alterations in the property to adapt it

to the special use of the Defendant, and

that as renovated for Defendant the

property is not suitable for other

tenants, then Plaintiff may recover the

expense of renovation as special damages

for breach of contract.

This special damage instruction is adequate in light of

Purington v. Sound West (1977), 173 Mont. 106, 111, 566 P.2d

795, 798, where we explained that "special damages are the

natural but not necessary result of the wrong or breach."

The District Court, in denying UPI's motion on this

point observed:

Defendant claims that the compensatory

damages were excessive and there was a

double recovery. There were two

principal witnesses on this question,

plaintiff and expert fee appraiser Bob

White. The jury accepted their

testimony, as they had a right to

do. .. Defendant claims: "There was

absolutely no testimony that any of the

features of the office space were unique

to the defendant United Pacific." ...

From this defendant argues that there was

a double recovery, once for the

remodeling, and again for the rental.

However, there was a quantity of

testimony by plaintiff and by White that

there was very little, if any, chance of

leasing this space to any other tenant

and that the remodeling which had been

done would have to be torn out and a

complete new renovation performed for any

new tenant. Indeed, the testimony was

that it would be very difficult to get a

new tenant but that if one was obtained,

that the renovation would have to be

completely different and the premises

rebuilt to meet that new tenant's

individual taste. Thus the jury could

have believed that the plaintiff derived

no benefit whatever from the remodeling

which he did and which cost him,

according to his testimony, in excess of

$90,000.00.

PITicholson did not receive double recovery under the

jury verdict. His expectancy, when entering into the lease

agreement was two-fold. First, he would have the rent

payments for the term of the lease. Secondly, he would have,

at the end of that term, a finished office space and for that

reason would be in a position of comparative advantage

vis-a-vis any competition for the next lease UP1 would enter

into. This second expectancy was also damaged by UPI's

breach.

We do not rely on the na.rrow rule articulated in

H. S. & D. Investment, 9 P.2d 809 and Brodsky, 137 N.W.2d.

771, for two reasons. First, those cases are factually

distinguishable from the case at bar. In those decisions,

within 5% and 20 months respectively, new tenants were found

for the premises at the same rent the defaulting lessees had

agreed to pay. In H. S. & D. Investment, 9 P.2d at 811, the

lessor did not request as special damages the costs of

renovating the premises for the lessee prior to the breach,

as Nicholson did here. Rather, the lessee requested, and the

Oregon court held, that the defaulting lessee was not

responsible for the remodeling costs incurred after the

breach. In Brodsky, 137 N.W.2d 771, the lessor was not

required to make any special renovations of the premises for

the lessee. Here, prior to entering into the lease

a.greement, UP1 requested, and had a great deal of control

over, a very specific renovation for its particular purposes.

Second, to hold, under Brodsky, supra, that renovation costs

are not recoverable would work an injustice and fly in the

face of strong evidence of injury. We choose to follow the

more fundamental rule that damages are designed to make the

injured party whole and to compensate for the injury caused

by the breach. Agrilease Inc. v. Gray (1977), 173 Mont. 151,

566 P.2d 1114; Bos v. Dolajak (1975), 167 Mont. 1, 534 P.2d

1258.

UP1 argues that since the District Court erred in not

directing a verdict in its favor, it consequently erred in

awarding attorney's fees, as provided for in the agreement,

to Nicholson. Since we ruled above that the District Court

did not err, UP1 cannot prevail with this argument. UP1

makes no other allegation that the award of attorney's fees

is not supported by the evidence or is otherwise flawed, so

the award stands.

In the last issue, Nicholson alleges error because the

District Court set the judgment interest rate at 10% rather

than the requested 18% and awarded him only $858.70 of the

requested $20,000 in costs. Nicholson points to Section

18.09 of the lease agreement which provides that UP1 was to

indemnify him for finance costs of the construction at a rate

of 18%. Nicholson argues that this same rate should apply to

all liabilities under the lease, and cites several cases

holding that interest rates set in a contract should also

apply to any pre- and post-judgment liabilities. For

example, in Pacific States Corporation v. Hall (9th Cir.

1948), 166 F.2d 668, the plaintiff brought suit on a

promissory note which was due within five years after the

date "with interest from date until paid at the rate of seven

per cent per annum, payable quarterly, in advance." 166 F.2d

at 672. The court enforced the note as written stating

"where, as here, there is an express provision requiring a

certain rate of interest until the principal is paid, the

contract must be so enforced." (Citations omitted.) 166

F.2d at 672. The other cases cited by Nicholson are to the

sa.me effect. Nicholson contends that the court abrogated the

parties' agreement in setting the interest rate at the lower

figure.

An interest rate contained in one relatively minor and

discrete part of the contract should not be an umbrella over

the entire obligation. It is contrary to the parties'

legitimate expectations. The lease agreement was otherwise

complete in almost every detail. If the parties intended

Section 18.09 to apply to - obligations arising from the

all

agreement including breach, they could easily have so stated.

Pacific States, 166 F.2d 668, is not controlling because it

dealt with a simple obligation, a promissory note. The

judgment in that case was directly on the note. Here, we

have damages for breach of contract and, in addition,

attorney's fees and other costs beyond the contract amount.

The District Court reasoned that these damages were not

amounts due under the contract for lease and thus not matters

envisioned by the parties. We hold that the District Court

correctly applied the statutory rate of interest provided for

in § 25-9-205(2), MCA, to the judgment rendered in this case.

Following the judgment, Nicholson made an application,

pursuant to $

$ 25-10-501, MCA, for statutory costs and

requested the court award him "expenses and disbursements"

pursuant to Section 14.03 of the lease. The court awarded

only the costs recoverable by statute. He elected to claim

his costs through a cost bill, and the court correctly

limited him to statutory costs. Nicholson cites authority

for the proposition that the parties to a contract may agree

to a recovery of expenses greater than provided by statute.

Although that is a correct statement of law, see, e.g.,

Leaseamerica Corp. of Wis. v. State (Mont. 1981), 625 P.2d

68, 3 8 St.Rep. 398; and Bovee v. Helland (1916), 52 Mont.

151, 156 P. 416, it does not address the issue presented by

the District Court's order. We hold that the District Court

correctly awarded costs.

The judgment entered on the verdict and the denial of

the motion for judgment notwithstanding the verdict are

affirmed.

t

We concur: /'

Mr. Justice John C. Sheehy, specially con.curring.

I concur with the above opinion of Mr. Justice

Gulbrandson, especially its result. I have some different

conceptions of the source and legal effect of the implied

covenant of good faith and fair dealing in contracts, which I

will express when necessary. The majority opinion here

serves well the case before us, and gives direction to courts

and lawyers in this developing field.

L.-

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